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In accounting terminology, a normal balance refers to the kind of balance that is considered normal or expected for each type of account. It can either be a debit balance or a credit balance. For asset and expense accounts, the normal balance is a debit balance. For liability, equity and revenue accounts, the normal balance is a credit balance.
Whether the normal balance is a credit or a debit balance is determined by what increases that particular account’s balance has. As such, in a cash account, any debit will increase the cash account balance, hence its normal balance is a debit one. The same is true for all expense accounts, such as the utilities expense account. In contrast, a credit, not a debit, is what increases a revenue account, hence for this type of account, the normal balance is a credit balance.
All this is basic and common sense for accountants, bookkeepers and other people experienced in studying balance sheets, but it can make a layman scratch his head. To better understand normal balances, one should first be familiar with accounting terms such as debits, credits, and the different types of accounts. Basically, once the basic accounting terminology is learned and understood, the normal balance for each specific industry will become second nature.
Every business transaction, such as a sale, a purchase, or a payment, has either an associated debit or credit value. Generally, it has a debit value if it implies a decrease in liabilities, or an increase in assets. Meanwhile, a transaction has a credit value if it signifies an increase in liabilities, or a decrease in assets. A transaction should correspond to only a debit or a credit, never to both at the same time. Generally speaking, debits are more desirable in a business than credits.
In a general ledger, or any other accounting journal, one always sees columns marked “debit” and “credit.” The debit column is always to the left of the credit column. Next to the debit and credit columns is usually a “balance” column. Under this column, the difference between the debit and the credit is recorded. If the debit is larger than the credit, the resultant difference is a debit, and this is listed as a numerical figure. If the credit is larger than the debit, the difference is a credit, and this is recorded as a negative number or, in accounting style, a number enclosed in parenthesis, as for example (500). Thus, if the entry under the balance column is 1,200, this reflects a debit balance. If it appears as (5000), then this is a credit balance. As mentioned, normal balances can either be credit or debit balances, depending on the account type.
A T-account is a special and basic tool that accountants also use to analyze transactions. It has the usual debit and credit columns, on the left and right sides respectively. But it has no balance column, nor even a date column that is normally found in other accounting records. Whether it has a credit balance or a debit balance can be determined by where the balance is written: on the left column for a debit balance, and on the right column for a credit balance.
In accounting, understanding normal balance will help you keep a close watch on your accounts and to know if there is a potential problem. This article gives great information that helps the reader understand this important accounting concept.